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Poland Grows Up :
Emerging market matures after joining EU

Just a few years ago, most commercial real estate investors considered Poland to be an emerging market with significant economic and political risks. Today, after four years as a member of the European Union, the Central European country is no longer viewed as a high-risk market, but an established, proven market with strong economic growth and stable demand across all real estate sectors.


"Since Poland's accession to the European Union in 2004, we have seen a steady maturation of the market, and a change in perception from an 'emerging market' to a stable low-risk European market," says James Foley, a real estate partner with Ernst & Young in Poland. "This has lowered the cost of capital and fueled foreign direct investment to every sector."

Mietek Godzisz, managing director of Hines' Polish operations, notes that Poland has been able to eradicate corruption, making it a safe and secure investment destination. "Competition is now the main worry to any real estate business active in Poland, which puts Poland into the basket of mature markets," he says. "We are generally positive about the future development of the country."

Hines entered Poland in 1997, kicking off its development activity with one of most prestigious and challenging locations in Warsaw - the Plac Pilsudskiego. At Plac Pilsudskiego, Hines completed a 38,000 square meter, seven-story office building with luxury retail shops on the ground floor called Metropolitan.

And Hines isn't the only real estate firm to make large investments in Poland; GE Real Estate, Heitman and Quinlan also are very active, along with a number of German funds. In fact, GE Real Estate has built a portfolio of Polish properties worth about $1.5 billion after entering the market in 2000 with a series of office, industrial and retail acquisitions, according to Karim Habra, managing director of GE Real Estate Central & Eastern Europe.

"Our plan is to continue to expand," Habra says. "We have shifted our business model from high-yield acquisitions to high-yield developments."

Economy continues to thrive
Poland's entrance into the EU brought about a huge change in its commercial real estate market, Godzisz says. The country eliminated a law that required businesses to obtain a permit from the Ministry of the Internal Affairs to buy land and properties. "The effects of lifting the discriminating law have proved to be a blessing for the Polish real estate market," he contends, adding that the market has benefited from increased transparency and easy access of foreign capital.

Since joining the EU, Poland has been one of the largest recipients of foreign direct investment (FDI), averaging €10 billion per year, according to Foley. Investors have been wowed by the size of the consumer market (roughly 38 million people), high levels of skill and education and relatively low salary levels.

Poland is the biggest and the fastest developing market in Central Europe, and strong export growth and solid levels of corporate investment have contributed to steady GDP increases over the past four years. Last year, Poland's economy hit an all-time record, with GDP growth peaking at 6.5 percent, according to Jones Lang LaSalle.

"There is increasing demand in the fields of credit, mortgages, finance and insurance," notes Ben Bannatyne, managing director of Central Europe for Jones Lang LaSalle. "In addition to services, Poland has established itself as a major manufacturing location, both in Europe and globally - particularly in the automotive sector."

In addition to business-related demand, Poland also is benefiting from thriving domestic demand. "There is a dynamic middle class in Poland, and they're very motivated and they're really hungry to do well," Habra notes. "The population drives a lot of the growth." In fact, Polish people have consumption patterns that are remarkably similar to developed economies - they want cars, nice homes, new appliances, fun vacations and private schools for their kids.

Aside from strong economic growth, Poland has also benefited from growing amounts of EU transfers for infrastructure and environmental projects, primarily because of UEFA's decision to hold the 2012 European Football Championships in Poland. The Championships are expected to enhance all planned investments and will accelerate the construction of new highways, roads, sport stadiums, airports, hotels and other facilities. In the past, other countries hosting the UEFA Championships have experienced an increase of GDP by additional 0.3-0.5 percent per year, Bannatyne says.

Opportunities lie beyond Warsaw
As Poland has transitioned from an emerging market to a more mature and transparent market, investors have seen their returns decrease. A number of more opportunistic investors who were pioneers in Central Europe have moved further east to the Ukraine and Russia in order to achieve higher returns, Bannatyne says.

However, many investors contend that Poland still offers plenty of opportunities, especially in the office sector and in larger secondary markets. Growth of the Polish office market is set to continue into 2008, with rents rising by over 15 percent in central Warsaw and 10 percent in regional cities, according to a report issued by Savills Poland.

Office vacancy levels have dropped to a record low of 3 percent and average rents have increased by 14 percent over the past year. Although construction activity is increasing, much of the demand remains unsatisfied since most of the development pipeline is pre-leased.

In addition to Warsaw, the regional office markets of Krakow, Wroclaw, Poznan, Katowice and Lodz are all in the spotlight as companies continue to expand their office networks into these cities.

In fact, experts say investors will generate the best returns in markets outside the capital city of Warsaw such as: Gdansk, Kracow, Wroclaw, Lodz, Katowice and Poznan. These cities, with populations of 550,000 to 750,000 people, are the centers of larger metropolitan areas of about 800,000 to 1 million people.

Katowice, for example, is the center of the highly-urbanized Silesian region with a total population of 4 million people - the largest concentration of people in all of Poland, larger even than the Warsaw metropolitan area.

While Houston-based Hines continues to actively develop in Warsaw, it also has expanded into Gdansk and Lodz and is currently developing six mixed-use projects totaling more than 110,000 square meters that include office and residential. Four of these most recently commenced projects are owned by the Hines International Real Estate Fund, according to Godzisz.

"We're seeing more and more investment outside of Warsaw, especially office investment," Habra says, adding that retail developers and investors have been looking outside of Warsaw for some time now. In fact, GE Real Estate has owned a portfolio of 12 shopping centers scattered across Poland for more than five years. The properties were purchased from French hypermarket retailer Group Casino.

In January, GE Real Estate made its first office investment outside of Warsaw, buying a 16,263 square meter, class A office building in Wroclaw, Poland's fourth largest city. In addition to Wroclaw, GE Real Estate is actively looking for office investments in Poznan and Kracow. And, the company, through its investment in Ronson Development Group, has a pipeline of 20 residential projects totaling 5,000 units in several cities including Poznan and Wroclaw.

"Poland has been a relatively good story for most foreign developers so far," Godzisz says, but points out that the Polish market has become very competitive. "While returns to be realized in Poland are normally still higher than those achievable in Western Europe, one must be careful...the market has become more sophisticated and more complicated."

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